18 Apr Will my law enforcement pension be subject to N.J. tax?

Q. I have an out-of-state law enforcement pension that will be about $80,000 a year. My wife teaches in New Jersey and her salary is about $65,000 a year. We are both in our 40s. Would I be qualified for the pension exclusion? If not, how much would I be roughly taxed? Would it also matter if we file married but filing separate?
— Taxpayer, maybe

A. It’s important to remember that you should probably speak to a tax preparer who can look at your full financial situation and give you more accurate projections for any tax liability.

But here are some things you should know.

There are states that exempt out-of-state law enforcement pensions, but New Jersey is not one of them, said Colleen McCormick, a certified financial planner with Peapack Private Wealth Management in Bedminster.

“All pensions are taxable in New Jersey except for military pensions and survivor’s benefits,” she said. “The military pension exemption does not apply to civil service pensions or annuities, even if the pension or annuity is based on credit for military service. Railroad Retirement and disability benefits are also not taxable.”

New Jersey does provide some relief to retirees, McCormick said.

Social Security income is not taxed and there is a pension exclusion to reduce gross income.

To qualify for the pension exclusion, you must be 62 years old with income of less than $150,000, she said.

“There are requirements for this exclusion depending on your filing status and gross income but given your and your wife’s age the exclusion will not apply, and your pension will be reportable as income,” she said. “The taxable amount may be less than the total pension paid depending on previously taxed contributions. The taxable amount is reported on your pension 1099-R.”

While you should speak to a tax advisor about your situation, consider this example from McCormick. If you file a joint return with no additional dependents or deductions, an $80,000 pension adds an additional $4,002 to your New Jersey income tax bill. If you file married filing separately, you can save $177 combined, she said.

“However, please note, if you file separately in New Jersey, you will need to file separately on your federal return as well,” she said. “Filing separately may save you tax dollars, but filing separately does carry disadvantages, primarily the forfeiture of a number of major tax credits and deductions.”

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This story was originally published on April 18, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.